By  on July 7, 2008

Get ready for what could be a cold second half.

The retail environment has been brutally tough, and federal stimulus checks appear to have done little so far but blunt the stunning force of higher gas and food prices. Even with a presidential election less than four months away, financial experts see little on the horizon to suggest a rebound for consumer spending any time soon.

"Consumers are on the brink of a substantial downturn, the likes of which has not been seen since the Seventies," said Merrill Lynch's North American economist David A. Rosenberg. "We believe that the stimulus checks are pretty much the only thing keeping the consumer afloat. Once that stimulus has been delivered and spent, by July or August, consumer spending is likely to sink."

One fund manager for an institutional investor is predicting sales "will get worse before they get better, and from what I can see, back-to-school sales are not going to be there. Consumers are spending on food and gas for the car."

Bob Carbonell, the chief credit officer at Bernard Sands, a credit-checking firm, commented last month that there is a "lot riding on back-to-school at many retailers [and if sales don't] materialize, I can see manufacturers and factors rethinking their holiday commitments."

Despite the lackluster retail environment and pressures on consumers' household budgets, J.C. Penney's chief executive Myron "Mike" Ullman 3rd was hopeful about b-t-s sales, based to some degree on the basic need to buy kids apparel for the new school year. However, his optimism came at a time of emphatic pragmatism as the retailer disclosed plans to scale back on capital expenditures in 2009 and both open and renovate fewer stores.

Still, he acknowledged that, with seven years of strong b-t-s selling seasons, Penney's is up against tough comparisons, and getting even decent results this year won't be easy.

Some retailers may have already started pulling in their horns, preferring to err on the side of caution instead of risking huge markdowns to clear inventory for the fall and holiday floor sets.

Gary Wassner, president of Hilldun Factors, said some retailers have already reduced orders for holiday, either by putting in smaller orders or cancelling those already placed."My sense is that this malaise carries on through Christmas. I think by spring, maybe, we'll start to see some relief. The world can't sustain all this uncertainty over the effects of rising oil prices [indefinitely]," Wassner said.

James Schaye, president and ceo of Hudson Capital Partners LLC, a liquidator, said, "I think this will last for at least the next nine months."

Along with Great American Group and Silverman Jeweler Consultants, Schaye's firm is seeking Dela­ware bankruptcy court approval as the so-called "stalking-horse bidder" for the sale of stores that bankrupt Whitehall Jewellers Inc. is planning to shutter. His firm is just about finishing up the sale of the assets from bankrupt Friedman's Jewelers Inc. that Whitehall elected not to buy in April.

A pessimist, Schaye isn't seeing anything positive to turn around the economy and get consumers back on track with their spending.

"Banks are getting nervous and have begun clamping down on loans to decrease the level of risk on their balance sheets," he said. "We absolutely believe that there are underlying economic and operational issues that won't end any time soon. It started in furniture, and then moved to jewelry. You'll see it start to snowball into other specialty stores, and it will first hit the mediocre retailers. I'm not sure what the landlords will do with all this real estate that will become available."

CIT, which provides loans to middle-market businesses and whose factoring arm is a big player in the fashion scene, has had to keep close tabs on its balance sheet due to losses from the subprime debacle last August. It recently pulled approvals on shipments to Mervyns, a move that one vendor said was closely tied to CIT's need to become more risk-averse in the current economic environment.

Concern about job stability and availability have contributed to a steep and prolonged decline in consumer confidence, which in turn drove the Conference Board's June reading of that key metric to its lowest level in 16 years as angst about employment collided with ongoing concern about falling home values and higher prices.

The monthly Consumer Con­fidence Index finished June at 50.4, down from 58.1 in May. The two key components both fell, with the Present Situation Index down to 64.5 from 74.2, and, reaching an all-time low, the Expectations Index declining to 41 from 47.3.The index fell as low as 70.7 during the 2001 contraction and to 55.3 during the 1990-1991 slump. It has now fallen nearly 55 percent from its July 2007 reading of 111.9.

Merrill Lynch's Rosenberg said the index has "fallen 12 points since the tax rebates were first mailed out two months ago."

The economist noted that in the June survey, "those expecting incomes to decline rose to an all-time high of 15.9 percent from 14.6 percent [and] for the second month in a row, and the first time on record, the share of those looking for lower income has exceeded the share looking for higher income."

He added that perceptions about jobs are "clearly deteriorating," as those believing that jobs are hard to get rose to 30.5 percent from 28.3 percent.

Rosenberg also noted that unemployment for the youth demographic is surging, as confidence for those under age 35 dropped to 65 in June from 68.4 in May, the sixth consecutive monthly drop. Confidence among those age 55 and older is also down, falling to 44.3 in June from 49.8 in May. The results for both demographics, those under 35 and at least 55 years old, are at the lowest levels since February 1992.

According to the economist, the plunge in consumer confidence "confirms that the U.S. consumer is on the brink of a very large pullback indeed, perhaps even one for the record books." Rosenberg said that big-ticket spending, such as purchasing of appliances and new homes, has been abandoned, and vacation plans have dropped to the lowest since the Sixties.

According to David Wyss, economist at Standard & Poor's, the University of Michigan's consumer sentiment index is even more downbeat, dropping to a 28-year low of 56.4, the third-lowest reading in its 56-year history.

Unlike Rosenberg, Wyss said there was some spending of the rebate payments on big-ticket items, such as electronics. However, he concurred with Rosenberg on the future of consumer spending: Personal income may have been up by 1.9 percent in May, but that's due to the stimulus checks and will reverse in the coming months.

In short, "consumer nervousness isn't keeping us away from the malls, at least as long as we have nice, crisp rebate checks in our pockets," Wyss said.Standard & Poor's said in a report that "consumer products, media and entertainment, and retail/restaurants sectors remain most susceptible to economic and credit-market turbulence."

"Weakness in the consumer products, media and entertainment and retail/restaurants sectors is a result of U.S. consumers' diminished economic prospects," said Diane Vazza, head of Standard & Poor's Global Fixed Income Research Group.

"Consumer spending is critical to continued economic expansion, as it accounts for 70 percent of the U.S. [gross domestic product]," Vazza said, noting these cyclical sectors rely heavily on consumer spending, which has recently declined after showing resilience in 2007.

"We expect consumer spending to grow only 1.4 percent in 2008," she added. "This is a deceleration compared with 2.9 percent in 2007 and 3.1 percent in 2006."

These days, even once unstoppable spending on luxury goods has seen a slowdown, reflecting the new shopping penchant for less, or at least more discriminant, consumption.

Pam Danziger of Unity Marketing said that the drop in luxury consumer confidence and resulting cut in spending from holiday 2007 and into 2008 can be attributed to the economic backdrop of the subprime mortgage crisis. In addition to waves of layoffs, there's been concern over the increases in the price of oil and the decline of the dollar, which make imported goods — gasoline included — more expensive for U.S. consumers.

According to her proprietary research, expectations of future luxury spending are also grim, as some 39 percent said that they will spend less on luxury goods in 2008, while only 16 percent said that they would spend more.

She expects luxury consumer spending to be flat through the November 2008 elections, predicting the promise of new leadership in the White House will lift the spirits of the affluent and encourage them to open their wallets.

And, while many luxury consumers will invest in their homes, those aspiring to luxury who traded up will trade down in 2008.

That doesn't mean that the "trading up" consumer — those who have famously embraced "aspirational" spending in recent years — will stop buying, she said. "Instead of buying a new Gucci handbag, they will still get their Gucci thrill from the latest perfume," Danziger concluded.

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